Amortization Archives - Gina Farrell

An Overview of Amortization: It Plays A Role In Monthly Mortgage Payments Even though this may sound like a fancy word, amortization is simply a long word for a straightforward topic. Furthermore, it plays a significant role in the determination of monthly mortgage payments.

Before taking out a home loan, homeowners need to understand how their payment schedule works and what this means for the future of the home loan.

Amortization refers to the way monthly payments are calculated to make sure that homeowners pay the same amount every month throughout the life of the loan. Even if homeowners do not stay in the house for the life of the loan, amortization will still play a significant role in the amount of money they receive if they decide to sell the home.

Amortization Plays A Major Role In Calculating Monthly Payments

First, amortization plays a major role in calculating monthly payments because it ensures that homeowners pay the same amount of money over the life of the loan. Even though there is interest on the home loan, and inflation will play a role in the value of money during the life of the loan, the monthly payment is going to stay the same. This is particularly beneficial to homeowners who are still working and believe that their income is going to go up during the life of a 15 year or 30 year mortgage. Even if their income goes up, and even if inflation plays a role, their monthly mortgage payments will still stay the same thanks to amortization.

Amortization Divides Interest And Principal In Monthly Payments

On the other hand, amortization also plays a role in calculating interest versus principal in monthly mortgage payments. At the beginning of the loan, the majority of each monthly payment goes toward interest on the loan. At the end of the loan, the majority of each monthly payment goes toward principal. This also means that if homeowners decide to sell their home at some point during the loan, they might not get as much money as they think because most of their monthly payments have gone toward interest and haven’t built up any equity. This is another key factor homeowners should keep in mind when it comes to amortization.

5 Financial Terms Every Real Estate Investor Should Know The success of your real estate ventures depends on your ability to navigate the financial world. Learn these terms to make it easier to understand what’s going on with your real estate investments.

Cash Flow

Contrary to popular belief, cash flow isn’t just the amount of liquid assets you have available. Your cash and unused lines of credit are an essential indicator of your ability to complete projects and pay the cost of ongoing operations. However, these factors don’t tell the whole financial story.

Your actual cash flow is the difference between your gross income and your financial obligations. You can have a large cash reserve but still have a negative cash flow if you aren’t making enough to cover your obligations.

Gross Yield

When evaluating potential properties, it’s helpful to understand the gross yield. To calculate gross yield, divide the annual income you expect the property to produce by the property’s price. This number comes in handy for comparing properties and narrowing down your options.

Amortization

Lending institutions offer a variety of loan structures to fit your goals and financial standing. An amortized loan features a set amount of interest. This amount is integrated into each monthly payment. That means that borrowers are paying on the loan’s principal and paying down their interest liabilities from the very first payment.

Amortization is an excellent way to quickly build equity. This enables real estate investors to use existing properties to fund other projects without having to sell off their holdings.

Carrying Costs

Flippers and other short-term real estate investors need to keep a close eye on their carrying costs. These are all the expenses incurred after the initial purchase and before the property is sold for profit. Carrying costs include mortgage and interest payments, utility bills, taxes, and insurance.

The best way to limit carrying costs is to flip your property as quickly as possible. However, sudden changes in the market, illness, and other unexpected factors can prolong your need to make monthly payments. In this event, investors should carefully monitor their cash flow to ensure they don’t end up losing their entire investment.

Double Close

Wholesale home buyers often already have an exit strategy before signing on new properties. In this case, a double closing allows the wholesaler to purchase the property and sell it to a new buyer in a single transaction. This is also sometimes called a back-to-back closing.

Knowing these terms will make it easier for you to manage the financial details of your real estate investments as well as partnering with a trusted and skilled home mortgage professional.

An Overview of Amortization: It Plays A Role In Monthly Mortgage Payments

5 Financial Terms Every Real Estate Investor Should Know

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